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Explained: Why the central bank’s digital currency troubles have lessons for India and others

Some of the world’s first digital currency experiments are running into hurdles and could serve as lessons for the Reserve Bank of India, which plans to launch his central bank digital currency (CBDC) next fiscal year.

Recently, a digital currency used by seven Caribbean countries experienced issues that kept it offline for more than a month.

What is a CBDC and what is it for?

The CBDC is a legal tender currency issued by a central bank in digital form. It is similar to fiat currency issued in paper and is interchangeable with any other fiat currency. The RBI is expected to launch the CBDC from the next fiscal year. This follows government plans to launch the CBDC which will be backed by blockchain technology.

According to Investopedia, the purpose of CBDCs is to provide users with the convenience and security of digital as well as the regulated and backed-up circulation of the traditional banking system.

Which countries have launched their CBDCs or plan to do so?

According to the Atlantic Council’s CBDC tracker, nine countries or currency unions have launched their digital currencies, while 15 are in the pilot phase. In addition, 16, including India, are in the development phase and 40 in the research phase. Seven are inactive and two have canceled any launch plans.

Among the nine that launched it are the Bahamas, the seven Caribbean nations and Nigeria. These pilot projects include South Africa, Saudi Arabia, United Arab Emirates, China, Russia, Sweden, Malaysia, Singapore and Thailand.

The Bahamas launched the world’s first CBDC in October 2020 under the name “Sand Dollar”.

China introduced e-CNY, the digital form of the Chinese Yuan, at the Beijing Winter Olympics. It was reportedly used to make more than 2 million yuan in payments per day. Reuters reported last week that the latest trial was notable for the number of people attending the Games, and that athletes, coaches and media around the world could use it via smartphone apps, physical payment cards or wristbands.

What are the glitches encountered?

Quoting bank officials, Bloomberg reported that the digital version of the East Caribbean Dollar – DCash – has been offline for over a month and could take several more days to restore. The report quotes Josh Lipsky, director of the Atlantic Council’s Geoeconomic Center: “This is an important case study of the things that can go wrong in the deployment and expansion of a digital currency…Each country trying to do a large deployment had problems”.

The emergence of such problems has prompted financial industry experts to call on central banks to make the necessary preparations to allow enough leeway for banks and other stakeholders in the financial services ecosystem to prepare their systems to process currencies. and develop solutions to problems as they develop. .

Are countries facing other challenges in adopting digital currencies?

The Central American nation of El Salvador last year Bitcoin Adopted as legal tender alongside the US dollar, and in addition to facing technical issues on its Chivo payment platform which was to be used to transact, the country also encountered macroeconomic issues with the volatility of Bitcoin. The Chivo system also reportedly failed to prevent identity fraud, leading to unscrupulous use of the $30 sign-up bonus offered to users.

But the fiscal deficit issues that Salvadoran President Nayib Bukele hoped to solve by using bitcoin as legal tender remained even after the move. To finance deficit spending, Bukele had requested $1 billion in loans from the International Monetary Fund, but the agency refused to lend the money, raising concerns about the country’s bitcoin program.

The volatility and speculative nature of private cryptocurrencies like Bitcoin, Ether, etc. are what are driving many central banks around the world to adopt their own digital currencies.

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Where is India’s plan?

During the budget speech, Finance Minister Nirmala Sitharaman announced that RBI would launch the CBDC in the next fiscal year. While the RBI is still working on the finalities, it is understood that the CBDC will be based on Blockchain technology. Prime Minister Narendra Modi said that with the launch of the revamped digital version of Indian Rupee, people could easily convert digital currency to physical currency and vice-versa, which will strengthen India’s digital economy and ecosystem. India. Digital payments and online fund transfers will be more secure with the launch of the CBDC, he said, adding that it will also streamline the global digital payment system.